This article was published in Business Times’ column “Chart Point” on 24 September 2018.
Nikkei 225 Daily Timeframe Source: Bloomberg, PSR
Red line = 20 period moving average, Blue line = 60 period moving average, Green line = 200 period moving average
At the latest monetary policy meeting, the Bank of Japan (BOJ) reiterated the dovish stance of maintaining extremely low levels of short and long-term interest rate for an extended period of time until the Core Consumer Price Index (CPI) exceeds 2% and stays above the target range in a stable manner. Do note that the current Core CPI in Japan is at 0.90% on a YoY perspective. In other words, it will still take some time before inflation reaches the BOJ’s target of 2%. The board has also recommitted to maintaining the asset purchase program at the same pace as the previous meetings, keeping financial condition highly accommodative. All in, the BOJ remains one of the major central banks in the world that is still keeping the interest rate at a record low level and pumping liquidity into the market through the asset purchase program. Hence, the Japanese equity market should continue to be supported by the easy monetary policy in the near-term with no sign of tightening in sight yet.
On the price front, the Nikkei 225 has been stuck in the major ascending triangle since April after a period of violent selloff in February and March. Since establishing a bottom at 20,140 low in March, the Nikkei 225 made some strong recovery, but the bullish move was met with an unrelenting ceiling at 23,010 points. In total, the 23,010 resistance area capped the bullish move on four occasions. On the other hand, the uptrend line and 200-day moving average was also supporting the Nikkei 225 to the upside. As price approached near the breaking point of the ascending triangle, the market finally revealed their intent. The bulls succeeded in breaking above the 23,010 points resistance area this time signalling a bullish narrative. More importantly, the bullish break was a convincing one with the Nikkei 225 advancing 1.35% on 18 September, the day of the bullish breakout.
Therefore, the immediate trend has turned bullish, in line with the long-term trend. Expect the Nikkei 225 to stair-step higher moving forward with the 20 and 60-day moving average acting as a springboard for propelling price higher. The bulls should be targeting the 2018 high of 24,170 points next as the bullish momentum sustains.
From a longer-term perspective, according to the ascending triangle bullish breakout projection, the bulls should be aiming for the 26,000 points area next representing +9% upside from current price. The projection is calculated by adding the difference between the extreme high (23,050) and extreme low (20,140) of the ascending triangle to the breakout point. All in, the 26,000 points target is not too farfetched since the consolidation has been going on for the past six months. A clear sign of the pent-up energy can be illustrated by the +1.35% bullish break on 18 September. However, if a deeper selloff was to occur, expect the uptrend line and 200-day moving average to reverse price back into the uptrend.